How much is opium for the people? How the FOREX works and whether it is needed. (Part II)

A month ago, my article appeared on Habré. Surprisingly, she provoked a rather large stream of comments, which for the most part approved the author’s thoughts, but also a flurry of negative and overly emotional evaluations from representatives of forex kitchens.

In addition, a number of provocative questions were asked, which can be conventionally reduced to a variation of one of two:
')

1. What are the criteria for "cuisine"? (variations: is this broker (name) kitchen or not? and so on)
2. What is the difference between ITinvest services and services of kitchens criticized by you?

Not wanting to engage in controversy and dispute with representatives of the forex community (after all, the article was not written for them), I, nevertheless, felt obliged to continue the explanation of what “correct” forex is, and also:

• why and under what conditions we offer it,
• how it is regulated and how it should be regulated
• why all forex kitchens are currently engaged in illegal business activities.

Along the way, the reader will receive an answer to the provocative questions formulated above. To whom the text will seem boring - please read only the headings.

How was it earlier and how is the exchange better than interbank?

In 1994 and 1995, I worked on the banking currency desk and banged briskly on the keys of the Reuters Dealing trading system. We worked mainly on the MM (Money Market) market, on taiga bonds and, of course, on currencies. They traded the dollar against the German mark, pound, yen, Swiss and French francs, and, of course, the ruble-dollar. The work went on its own position, but the basis for the functioning of the desk was still customer orders. So we worked to ensure the export-import operations of a large clientele of the bank. The minimum lot is 1 million dollars (pounds, DM, ...) and 1 billion rubles in transactions with the ruble. The euro was not yet in circulation, and the ruble was not yet completely denominated.



Why am I telling you everything? In addition, I know firsthand how the market is organized, who its real participants are and why these participants need the foreign exchange market. Only from the inside you can understand how the delivery and settlement of purchased and sold currencies actually takes place. Of course, the market has changed since then. But not too dramatically. Banks - the main players in this market have not stopped trading in the interbank market. Deutsche Bank (according to some estimates, holding about 40% of this market), as well as other global players: UBS, Citi, Morgan Stanley, Goldman Sachs and JPMorgan still do weather in this market and participate in trading of almost all sites where currencies are traded. If you find in this row the name of your company that provides access to the global global FOREX market (or the mythical liquidity aggregator your forex kitchen works with), tell me, and I will definitely mark them on the world forex map.

However, in addition to the interbank market, other liquidity pools have developed over the past few years. Here it is worth mentioning, first of all, the exchange market of the Moscow Exchange, which has existed since 1992. Recall that the exchange and was formed primarily as a currency market: MICEX - Moscow Interbank Currency Exchange. Did you read the name carefully? If not, read again.
So, why do we need a stock exchange, if there is an over-the-counter market? Just to

• A) ensure the reliability of settlements (the exchange removes the risk of non-delivery from the counterparty),
• B) provide market liquidity (the exchange collects all bidders in one place at one time),
• C) ensure fairness and transparency of the price of the traded commodity - the price is determined as a result of the “auction”, which is continuously carried out in the “stock exchange” during the auction.

You can get acquainted with the device of exchanges in more detail on the site of the Moscow Exchange group of companies, or "from a bird's eye view" in one of our previous publications .

Electronic trading platforms - alternative to the exchanges

In the west, instead of currency exchanges, other liquidity pools have developed, the so-called ECN (Electronic Communication Network) and MTF (Multilateral Trading Facility). What is the difference between them and the exchanges, we will not analyze now, leaving it for later. Let me just say that all of them, as well as the exchanges, operate under American or European legislation and are subject to the SEC or MiFID directives. On these ECNs, there are stock exchange glasses and other stock charms that allow them to provide the same benefits that the exchange provides, namely, liquidity and fair prices at any given time.

Here, for example, the figure shows ECN Currenex “stock market”, which major clients of our company have access to:



Standard lot - 1 million, but it is clear that some participants put 100 thousand (0.1) and even 50 thousand (0.05). In addition, it is clear that the spread for 1 million euros is only 0.5 pips, and for 12 million - already 1.5 pips.

Currenex is the largest electronic platform in North America owned by StateStreet Corp. Almost all currencies are traded against it. However, the delivery and settlement of transactions made outside of this ECN.

In Europe, one of the most famous currency markets is EBS , owned by ICap voice broker. In addition to these two liquidity aggregators, there are several smaller sites and, finally, there is just the interbank market, where the main player (at least in Europe) is still Deutsche Bank.

What are the criteria for "cuisine"?

Now, armed with this knowledge, we will try to answer the question posed. To do this, we need to examine the argument (the rules, the contract, the user agreement or any other document that describes the essence of the relationship between the client and the alleged "kitchen"). So far, we are interested in the agriment two things: how the supply of currency is arranged and how the calculations for it are arranged (we, after all, go to buy the currency on the world market, and not to play in thimbles). We know that the delivery of the euro, for example, must go to a bank account opened in euro currency, and the delivery of dollars to a dollar account. Both accounts must be opened in a reputable commercial bank, which is known to operate in the global FOREX market. Settlements for completed transactions by default should be on spot, i.e. on the third trading day, counting from today (unless, of course, when making a transaction, other conditions are not specified, which also happens, but it is still an exception). Those. if you make a BUY 1 EUR / USD @ 1.3588 transaction, it means that $ 1,358,800 must go out from your dollar account “the day after tomorrow”, and 1 mio EUR should arrive in your account in euro with a value date “day after tomorrow”.

When you buy one currency against another currency (which in this case is sold), you will have a long position in the first and a short position in the second, unless of course you have had a second currency in sufficient quantity. After the delivery and settlements have passed, interest will be “dripping” for having a long position, as to the current account at the rate accepted for this currency. For having a short bank, you will be charged interest, as for a loan or for an overdraft on an account at the rates accepted for this currency. These rates for different currencies and for different directions positions naturally differ. Check if all these conditions are stipulated in the kitchen.

The cost of processing the transaction does not depend on its volume. Accordingly, 10k transactions have a unit cost 100 times greater than 1mio transactions.

It is in the interbank market. Why on the interbank settlements go on the third working day? Because there is no central clearing. The next day after the transaction, back offices of banks for documents received from desks draw up documents on all transactions made, contact counterparties, receive confirmation from them, draw up contracts if necessary, and sum up the results of trading in a single register of payments, which on the third day goes to the settlement department and correspondent relations. This is a big job that requires a lot of people, a developed correspondent network. Only large banks can afford the pleasure of active trading in the international foreign exchange market.



Not only this, it is necessary for other participants to open limits on the bank. Are you sure that serious players have opened limits on your "kitchen"? Ask these players. A list of them is given above. That is why the minimum lot in the interbank market is equal to one million dollars or pounds or euros (not important). The cost of the transaction makes small transactions in the interbank market unprofitable. All the bullshit regarding the developed advanced routing system and processing applications for various dealing desks and liquidity aggregators depending on the volume, as well as supposedly existing advanced technologies of the “modern forex industry” remain bullshit, puffing up the cheeks and hide the commonplace rule: a typical forex broker anywhere a deal their customers are not really output. Well, of course, except for hedging the balance of an open currency position.

The rules on the stock market are the same, but due to the standardization and cheapening of the mechanism for concluding and confirming transactions, the size of the traded lot can be reduced from 1 million to 100k. It is theoretically possible to decrease to 10k (which we saw in the picture above), but placing orders below 100k in the ECN trading system is considered bad form, and serious players avoid putting such small orders in a glass. In addition, since the cost of processing the executed order does not depend on its volume, transactions in 10k have a unit cost of 100 times greater than transactions in volume of 1 mio.

Standardization of transactions and settlements on them not only reduces the cost of transactions, but also makes it possible to reduce the time of settlements for completed transactions. So, on the currency market of the Moscow Exchange, the main currency market operates in T + 1 mode. The same rule applies to Currenex.

Kitchen, who is your broker, where is your clearing, show your settlement bank?

Exchange or ECN give only a deal, but not calculations on it. For the sake of completeness, we lack clearing and settlement. Clearing and settlement of exchange transactions are made by independent organizations. Clearing is a procedure for reconciling the mutual obligations of participants based on the results of exchange trading. Activities, by the way, licensed in all countries. But clearing payments are carried out by special banking organizations - clearing houses of stock exchanges. The activity is also licensed.
For example, in the group of companies of the Moscow Exchange, the clearing is carried out by CJSC JSCB National Clearing Center (NCC), and the calculations are carried out by the NCO National Settlement Depository (CJSC NSD). It is there that the funds of our customers trading on the Moscow Exchange are kept.

And for our clients trading currencies on Currenex, the largest and oldest European clearing house, ABN AMRO Clearing , is owned by the state and clearing and settling transactions.



Therefore, if the forex kitchen declares that transactions are executed not on the over-the-counter market, but on the exchange itself, then the agriment with the client should indicate:

• A) the exchange (or other platform) on which transactions are made (the place of the transaction),
• B) a settlement organization that settles all completed transactions (the place where funds of bidders are kept).
• C) a clearing organization that reconciles mutual debts between participants in exchange trading, in the event that the marketplace allows clearing through several clearing houses.

The last two functions can be combined in one legal entity, but cannot be combined with the exchange. If your broker has foreseen and marked all these points in a trading house, then perhaps he is not a kitchen. However, most kitchens do not disclose any agriment on their websites. If you are very meticulous - they will give you look at the office. If you come there and persevere. After you sign it.

However, even when some forex-kitchen says that it gives the exchange market or ECN (even if it is the same Currenex), this does not necessarily mean that it really takes its customers there. This may mean that, as I noted above, it only hedges its own risks on this site. Check is easy. Ask who performs the clearing - go to the clearing site, look at its licenses, call and make sure that among the clients of this clearing is your esteemed forex kitchen. This is the case if the kitchen is not a bidder. She can act on a sub-broker scheme, right? The same with calculations. Therefore it is worth asking a completely non-trivial question: the kitchen, who is your broker, where is your clearing, where is your settlement bank?

And silence in response ...



If anyone finds in the list of participants of the Moscow Exchange trades at least one forex broker, let him immediately share this discovery.

What a commission, creator?

Another interesting question. The fact is that transactions cost money. Any transaction has its own cost, with the exception of a fictitious transaction concluded inside the kitchen, which is not sent anywhere. Let's look at the commission in the argument. Is there a commission or not? Are they higher or lower? Normal broker works for a fee. Kitchen - works without fees. Why should the kitchen take a commission if the client loses it all to her?

Another criterion of “cooking” is shoulder. Here, for example, that we can read on the site of one kitchen:

To start trading on a real account, you do not need a lot of money. In ****** there are accounts without a minimum deposit, which means that you can become a trader with almost any amount. At the same time, thanks to the possibilities of margin trading, you can make large transactions: a leverage of 1: 1000 will allow you to operate in the Forex market with an amount 1 000 times greater than the balance of your account.

This is a sign of the kitchen. No real player and no real financial intermediary will take the risk of giving not only 1000, but even 100 leverage.

I have not mentioned a single name in the previous or in this article, so I don’t need to accuse me of black PR or defamation of any particular company. However, there is Google, who knows everything. And all the names he knows. And all jurisdictions. And for some reason, suddenly all the kitchens turned out to be registered on some Grenadines, Caymans, BVIs and it is still not clear where. Where are Russian forex brokers? They are not with the exception of licensed brokerage companies and banks. But not about them.

Let us ask a question. And why, in fact, do they prefer offshore jurisdictions? The answer here is this: so that deceived clients go to sue them for ... In short, where they are only registered, but where there is no office, no money, no staff, or the international FOREX market itself. Such a wonderful global financial center in the Grenadines is built!

Ignorance of the laws is no excuse

However, there is another answer to the question: why are there no forex kitchens in Russian jurisdictions? It's simple. Exactly because their activity is illegal here. Therefore, they are present here in the form of unlicensed intermediaries and consultants who are not responsible for anything. What laws violate forex cuisine, registered in offshore, as well as their intermediaries and numerous consultants who live here is not clear at whose expense?

First, Federal Law No. 325 “On Organized Trading”, which regulates the activities of stock exchanges. The fact is that by organizing such a fictitious trade and calling it exchange trade (possibly for solidity and making a raid of legality), the “kitchen” falls within the scope of this law, since it actually carries out trade organization activities without a stock exchange license. This is illegal business activity on the territory of the Russian Federation, which can be stopped at any time.



Secondly, Federal Law No. 7 “On clearing and clearing activities”, which regulates clearing activities. Many employees of forex kitchens, after pressing them, say that they are clearing the clients' transactions within themselves, and some of them write it on websites. Say, one customer bought, another customer sold, why bring their transactions to the market? It is clear that this has nothing to do with real clearing. Just the wrong use of the term, intentionally misleading a potential client. In any case, such activity, if conducted, constitutes a violation of federal law No. 7. Clearing activities are possible only on the basis of a clearing organization’s license issued in accordance with the procedure established by law. This activity is not combined with stock exchange or brokerage licenses.

Thirdly, when customers interact with financial intermediaries: banks and professional participants in the securities market, their interests are protected by Federal Law No. 46- “On the Protection of the Rights and Lawful Interests of Investors in the Securities Market”, because The objectives of this law are to ensure state and public protection of the rights and legitimate interests of investors, as well as to determine the procedure for paying compensation and providing other forms of compensation for investors caused by unlawful actions by issuers and other participants in the securities market. When trading with forex-kukhnon, customers lose such protection. It is clear that no contracts for each transaction forex kitchen with its customers does not conclude. No contract for the transaction - no subject for protection. And those contracts that are offered, on the contrary, deduce the interaction between the client and forex cuisine from the Russian legislative field. If we try to arrange everything in the form of a contract of commission (commission), or an agency contract provided for by the Civil Code of Russia, then we will come to a professional licensed activity. We look at Federal Law No. 39 “On the Securities Market”, which regulates the activities of professional participants: brokers, dealers, depositories, etc. The activity of a broker or dealer without a license is the implementation of illegal business activities in the Russian Federation.

Fourthly, according to Art. 4 FL № 46 (Restrictions on the securities market in order to protect the rights and legitimate interests of investors), the terms of contracts concluded with investors, which limit the rights of investors in comparison with the rights provided for by the legislation of the Russian Federation on the protection of the rights and legitimate interests of investors in the securities market are insignificant. As mentioned above, no contracts for each transaction forex kitchen with its customers does not.

Fifth, the Federal Law No. 38 “On Advertising” has been violated in terms of publishing unfair and inaccurate advertising and promises of easy earnings, which are not there, using terms misleading the client, such as investments, exchange trading, currency trading, clearing, and dealing etc.

Financial intermediaries, by the way, Federal Law 38 prohibits promising or guaranteeing income, keeping silent about other conditions for the provision of relevant services that affect the amount of income received by the persons using the services, or the amount of expenses incurred by the persons who use the services if at least one of these conditions.

And the list goes on and on ...

When I see an advertisement in the metro, where a certain company invites me to take part in currency wars - as a professional, I know that this is not a figure of speech, but unfair advertising and deception of workers.

The only economic sense of kitchen forex is the selection of "extra" money ...

The trouble is that all Forex companies perfectly understand the illegitimacy and inferiority of their existence here in Russia and really want to legalize their activities. I have spoken in recent years with many of their representatives. And in private conversations, they all admit: what they provide is a game. The game is on betting. Spread betting. In Russian, this is the adoption of rates on the exchange rate. The sole purpose of this game is to satisfy the excitement and craving of players for risk. No more. There is no investment, there is no currency trading. There is a tote and bookmaking, clothed in the form of filing a trade order for a particular currency.

Then the question arises: why not get a bookmaker's license and calmly continue to honestly provide services, the economic meaning of which, if there is, is the selection of “extra” money from those entities that really have it?



But after all, no forex-kitchen does not want to be an honest bookmaker. They want to be the mistress of the sea respectable brokers and banks. So who is against something? Get, gentlemen, licenses and become on a par with professional participants, to which we belong.

If we are talking about creating a special regulation for forex firms, then it should be based on the following simple and clear to all principles:

1. Limiting the risk of customers by limiting the available leverage, depending on the volatility and liquidity of the traded instrument. Now this is not. Who is against?
2. Customer segregation at acceptable risk, depending on experience and trading capital. Now this is not.
3. Elimination of the existing conflict of interests between the client and the intermediary. Either the intermediary is an intermediary who works for a commission (broker), or he honestly assumes the risk and does not take commissions (dealer), but at the same time he cannot keep and dispose of clients' funds. Now it is not.
4. Introduction and control of risk standards per customer and for all customers integrally. Now this is not.
5. Introduction and control of the limit of open currency position in the firm. Now this is not.
6. Reasonable capital adequacy requirements for such companies.
7. Transparency of pricing and execution of transactions.

Regulation in any case should not contradict the current regulation in the financial sector or the Civil Code.

Finally, I want to say to those representatives of the near-market industry, who over the years of their work have not learned to see the difference between forex kitchens and normal brokers. It is approximately the same as between the "hotel for an hour" and a normal hotel of 3 or 4 or even 5 stars. The first serves the satisfaction of perhaps natural, but base needs, and the latter participate in economic life: they provide temporary shelter to people who are here for business or pleasure.

Why do we need stock markets? To stimulate business investment by providing investors with guarantees that they can always sell their shares at prevailing prices - and this ensures the liquidity of their investments. The forex market, as it is understood by representatives of forex kitchens, does not solve a single economic problem and is not needed in its pure form.

Post Scriptum

I re-read the text I just wrote and found that the topic “ what are we better than? »Not disclosed.


Author : Vladimir Tvardovsky, Chairman of the Board of ITinvest.